Governance Research Digest – May 2012
In this position paper, German research consultancy, imug, draw upon the issue of “secrecy jurisdictions and tax evasion” in line with expertise and research provided by internationally regarded governmental and non-governmental organizations. In this regard, the authors have selected a group of organizations as main focal points for their approach towards the topic: OECD, IMF, Financial Action Task Force, At-tac, Tax Justice Network and Global Financial Integrity.
- Tax avoidance and tax evasion are conceived of as being global challenges with significant financial and social impacts.
- Whereas tax evasion is a crime and therewith illegal, tax avoidance is not a criminal offence as it involves the abusive exploitation of gaps and loopholes in domestic and international tax law.
- Here, multinational companies (MNCs) capitalize on the possibility to shift profits from country to country, often to or via tax havens, with the intention of reducing the tax they pay on some or all of their profits.
- The issue of secrecy jurisdictions, tax honesty and tax avoidance implies numerous challenges and opportunities, as well as a clear business case for including tax as a corporate responsibility issue.
- The harmful consequences stemming from the existence of tax havens are manifold and can be clus-tered along the lines of three key themes (non-comprehensive):
- Loss in tax revenue: In public discourse, the loss of tax revenue is considered to be one of the most negative effects of secrecy jurisdictions. Thus, the loss of tax revenue might lead to a lack of financial assets that can be used for state investments in the development of the economy as well as for social and environmental projects.
- Jeopardizing financial market and economic stability: There are various examples of how tax havens/ secrecy jurisdictions can negatively affect financial market and economic stability. Hence, while channelling assets and liabilities through tax havens/secrecy jurisdictions, finan-cial institutions can hide negative liabilities and convey a false outlook on their financial stabil-ity.
- Enabling criminal activities: The opacity of tax havens/ secrecy jurisdictions creates an in-tentional and legally facilitated framework that potentially hinders the investigation into market participants active in tax havens/ secrecy jurisdictions as well as the activities conducted. As a result, money laundering, terrorist financing, drug trafficking, human trafficking, illegal arms trading, all sorts of fraud, and many more can be considered as natural outcomes of legally facilitated secrecy.